Review & Outlook: Smaller-But-Stronger Music And Games Industry Embraces Change During 2004

Marcus Webb

U.S.A. - 2004 brought mixed profitability , and momentous changes , to the amusement machine industry. Leading street operations were largely healthy and top FECs so much so that their new trade association president worried aloud about "complacency."

Many manufacturers and distributors complained throughout the year that cash-rich operators remained excessively cautious when it came to buying new equipment. Operators, for their part, grumbled that "there is not enough affordable equipment available." This song may have been a familiar duet, but it was far from two-part harmony.

On the technology side, digital music downloading finally achieved unquestioned dominance on the jukebox scene as Rowe, Rock-Ola, NSM aggressively joined TouchTunes in this market. Broadband continued to grow; Incredible Technologies and Sprint kicked online tournaments up to a new level with wireless 24/7 connections for IT's new golf game.

Old-timers like to say "amusements earn better during a recession." Some sectors of the $6 billion U.S. amusements trade actually do evidence a slight countercyclical pattern. But for the most part, the industry as a whole earns better when more Americans are working and the U.S. economy is growing , as it is now.

The bottom line: coin-op amusements is becoming smaller yet stronger, as greater market concentration means greater market power for operators, distributors and manufacturers alike. On the downside, the industry faces increasingly strong competition from legalized gambling and ever-tougher challenges from government regulators.

MIXED ASSESSMENTS

Leaders of the American Amusement Machine Association described an amusements industry that continues in the throes of a years-long consolidation and restructuring across the board, the ultimate outcome of which remains unknown. "That story has yet to be written; nothing comes without a fight," said AAMA chairman Frank Cosentino, vice-president of sales and marketing for Namco America.

AAMA president Mike Rudowicz saw fewer operators and less purchasing during the year. "The number of operators has been reduced by 60% in the last few years," he commented. "Many of the survivors are more in the 'moving business' than the new entertainment business."

All year long, Cosentino remained a vocal critic of operators responsible for the trade's soft sales picture. "Unjustified" sales resistance is "the only negative trend I see," he noted. "There are not enough operators saying, 'Yes, I believe in this industry and I'll take a chance on the product.' Too many operators sit with arms folded, saying they'll wait six months and if the market grows large enough so that my location says I have to have it, then I'll buy.'"

But the new president of the Amusement and Music Operators Association didn't view operators as sitting on any goldmines. Marion Paul of Fannie Farkle's (Gatlinburg, TN), told VENDING TIMES: "Currently, my perception is that business conditions are soft. Speaking as an arcade operator who frequently talks to many street operators, I believe the majority of operators are having a year filled with financial challenges. Different problems tend to be regional, so it's hard to say conclusively on a nationwide basis just what is truly the current mindset of 'the American operator.' But typical operators seem quite concerned about the quality and price of products that are available, and about just how fragile their operations are at the moment.

"Despite these many challenges," she added, "I believe the state of this industry is getting better, little by little. How strong our recovery will eventually be, only time will tell."

The new president of the International Association for the Leisure and Entertainment Industries said today's FEC industry is so successful that operators run the risk of getting too comfortable. "Overall, [the leisure and entertainment industry] appears to be a positive market with continued growth," observed Laurien Henry, owner of the Adventure Zone FEC (CalgaryAB, Canada). She cautioned that having just enough knowledge to turn a steady profit could actually be dangerous because it sometimes "breeds complacency."

THE URGE TO MERGE

Mergers were perhaps the single biggest trend that reshaped the music and games industry in 2004. Pachinko giant Sammy Corp. completed the long-sought acquisition of Sega with a stock swap deal; the two companies merged under a holding company on Oct. 1. The Sega board has already undergone a shakeup but that's only the beginning: Massive reorganization and consolidation appear likely. Rumors abound as to which personnel, product lines, subsidiaries and technologies will eventually survive. At press time, it was not even clear which Japanese city might eventually be the site of the new Sega-Sammy corporate headquarters.

Details may not be announced until after the close of Japan's 2004 fiscal year on March 31, 2005. However, two things are clear: Chairman Hajime Satomi is supremely ambitious and intends to lead a robust reinvigoration and revival of the video amusement field. "We aim to become the world's number-one comprehensive entertainment group," his staff reported. A key part of his expansion plan calls for more overseas arcade game sales.

Such a revival already is partly underway, points out VENDING TIMES columnist Kevin Williams of KWP (publisher of The Stinger Report). Williams points to promising new arcade video titles which have generated strong excitement among players, as well as the softer market for home video consoles. Yet any revival still has quite a way to go. The VT annual Census of the Industry showed that in 2003, video games slipped from being the number-two earner in U.S. locations to number three. (Pool is number one; entertainment merchandisers took the number-two slot.)

OPERATOR MOVES

The year's next largest mergers were on the operations level. Coinstar Inc. purchased American Coin Merchandising Inc. and its parent company, ACMI Holdings, for $235 million in cash. Coinstar is the owner-operator of a nationwide route of 11,000 coin-counting machines, e-payment kiosks and prepaid phone card venders with some 25,000 locations. ACMI, operating as Sugarloaf Creations (Louisville, CO), owns and operates more than 167,000 machines including cranes, bulk venders, kiddie rides and video games in more than 18,000 locations. ACMI is also owner of Folz Vending (Oceanside, NY), the nation's leading bulk vending operation. Combined, Coinstar and ACMI will have over 40,000 distribution points.

Dave & Buster's, the nation's top location-based entertainment chain, will expand from 33 sites to 42 in a single leap thanks to a $47 million acquisition of nine stores and certain assets of the bankrupt Jillian's chain.

Distribution also saw key mergers during 2004, with Betson purchasing Spirit Distributing and relaunching it as Betson Dallas, and Signature Sales & Service LLC acquiring Atlas Distributing Inc., the Midwest's largest amusement and vending distribution company, which is based in Elk Grove Village, IL.

Important mergers and acquisitions took place on the supplier level as well. In May, Happ Controls was acquired by Pfingsten Partners LLC for an undisclosed sum; the company immediately utilized its new financial resources to acquire Perfect 360 Controls, makers of a hi-tech joystick line. Kiddie Rides USA was sold to a newcomer to the industry in the fall.

ROILING WATERS OF DISTRIBUTION

2004's biggest controversy erupted in June when Incredible Technologies initiated a direct sales policy enabling operators who are members of the Amusement and Music Operators Association (later expanded to include bona fide state associations) to purchase equipment direct using the identical-tiered pricing basis as distributors. Service, parts and eventually financing would also be offered, said IT officials. CEO Elaine Hodgson stated: "It's going to be painful, but there needs to be more efficient representation of our products and greater profitability." She also estimated that "more than half" of distributors in the IT network were failing to adequately perform sales, promotional and educational functions.

Several distributors dropped the IT line in protest. Almost simultaneously, IT officials said they had ended their relationship with Betson due to the distributor's conflict of interest as a manufacturer of video games. But Betson differed, saying it had stopped representing the line before IT officially announced its direct sales policy announcement. In either case, disgruntled distributors accused IT of being "ungrateful" for past support and of "terminating distribution" as a group.

IT leaders held firm, noting that "it is not good business for us to blindly support a structure that does not spur aggressive sales of our product, because some personal feelings may be hurt." They also pointed out, "Some distributors have already been diversifying their businesses by becoming operators and manufacturers," making IT's move into direct distribution hardly unprecedented.

Some operators whispered concerns that IT's next step would be to sell direct to locations, while several distributors openly encouraged that fear by making the charge point-blank. IT strongly and repeatedly denied the accusation, although that was not enough to placate members of the Ohio Coin Machine Association, who voiced concern that "a long-established, highly efficient, four-tier distribution system (manufacturer, distributor, operator and location owner) may be in serious jeopardy." In August, OCMA leaders unanimously issued a joint resolution calling for "industry dialog" to resolve the "unneeded and unwanted controversy." At press time, AMOA-NY was considering endorsing the resolution.

Betson Enterprises also moved into direct sales, albeit on a more limited basis, with the announcement that it would handle worldwide sales and marketing for games made by Raw Thrills, the shop headed by former Midway game creator Eugene Jarvis and his team. Executives said Betson would "aggressively" expand its sales and marketing efforts for machines, not just parts, beyond the 15 markets coast to coast where it currently has offices, depots or representatives. Betson later clarified its policy, explaining that it would sell games directly to operators in parts of the country where no service is offered by Betson partners (i.e., other distributors who rep the Betson manufacturing line).

Despite these shakeups, distribution remains a stable and valued part of the industry. This fact was symbolized by Brady Distributing celebrating its 60th year in business and Betson's parent firm, H. Betti Industries, marking its 70th anniversary. Both milestones were celebrated with parties and open houses that drew small but top-notch attendance from across the country. Like many distributors, these leading chains remain profitable, powerful, admired and respected.

UP WITH DOWNLOADING

Downloading jukeboxes transitioned from parity with CD jukes to domination , at least in terms of interest and growth potential , of the market in 2004. While an estimated 80% of machines on location in the U.S. are still CD-based, the excitement and direction now clearly resides with downloading.

Rowe International stopped building Ecast-powered models in favor of its own line, powered by the broadband network of its subsidiary, AMI Entertainment, which also runs the music library. AMI has inked deals with all three Performing Rights Organizations, the Harry Fox Agency and the leading music labels.

Ecast officials said the company will continue to offer technical support for existing operators of Ecast-powered Rowe jukeboxes for as long as they operate these products. "Ecast's goal is to ensure that all software updates going forward will be backwards compatible for as long as it is technically feasible," said executives.

Rock-Ola rolled out multiple Ecast-powered models , from a compact, booth-styled wall box to full-sized floor and nostalgia models , and added Peavey commercial speakers and amplifiers for a dramatic upgrade in sound quality and power. NSM finally launched its long-promised, Ecast-powered "Chameleon" model in midyear; officials said operators placed orders for more units almost immediately.

Downloading pioneer TouchTunes, now a privately held firm once more, marked its 10th anniversary in the fall of 2004, and in November celebrated the installation of its 10,000th jukebox. At AMOA Expo it unveiled version 2.2.0 of its jukebox software, which features broadband capabilities. The company also announced receiving a U.S. patent for a link between a digital jukebox and an electronic game machine. TouchTunes' jukeboxes already are capable of establishing a data link with touchscreen games from Merit Industries, but more such interfaces appear to be in the works.

Perhaps the most important development that boosted downloading music in 2004 was the settlement of a patent infringement lawsuit between TouchTunes and Ecast. Operators' newfound confidence in downloading was clear when a whopping 90% of respondents told VENDING TIMES in mid-2004 that they plan to buy new jukeboxes next year (both downloading and CD models).

Elden Kingston, president of Mountain Coin Machine Distributors (Salt Lake City, UT), said downloading has finally arrived. "Many operators have realized [downloading music] is the future," he told VT. "It was hard for them to take a chance on it at first' now [operators] are starting to put them out and the attitude has really gotten a lot more positive. The income from downloading music is unbelievable; operators are making more money than they ever have in the history of the jukebox. That has definitely helped sales."

TECHNOLOGY ACCELERATES

Tomorrow's amusements industry will see more video connectivity and less cash, if 2004 trends and developments are any indication. Incredible Technologies announced it would incorporate new technology from Peppercoin to enable the use of credit cards for small transactions; IT's "Golden Tee Live!" will feature the technology. "This is the future of the industry!" enthused VT columnist Frank Seninsky of Alpha-Omega Amusements (E. Brunswick, NJ).

Looking beyond Peppercoin to the leading U.S. arcade chains, Kevin Williams noted: "Today, cashless payment systems represent the best-kept financial success stories for a growing number of leading North American-branded facilities. Beyond credit card- or ticket-style systems, cashless payment options are also beginning to include paying for amusement machine gameplay via cell phone billing' this technology is being explored and deployed for amusement application in Japan' which means Europe and the U.S. will likely follow in a couple of years."

Meanwhile, online video game tournaments and promotions are a global phenomenon fast approaching 100,000 connected units worldwide. In the U.S., nearly 40,000 video games are estimated to be online (Incredible Technologies has 28,000; Merit Industries reports 7,000; other companies are estimated to have 2,000). In Japan, some 29,000 video games are online today; this number is expected to grow rapidly in the coming year. Nearly 20,000 video games are networked in Europe (chiefly Photoplay with more than 10,000 countertop units, followed by Leisure Link and IT with a combined 5,000 or so units).

Online gaming took major steps forward in 2004. Incredible Technologies won an AMOA Innovator Award for "Golden Tee Live!," thanks to its constant wireless connection to IT's central servers using Sprint Communications' wireless modems. Taking full advantage of this 24/7 dedicated connection, the IT server will update leaderboard data on each game every hole or two. All "GTL" games are tournament contests; the new prize structure offers smaller but more broadly dispersed monetary awards to encourage more players to compete.